wiiw 1 the global financial crisis and macroeconomic policies: the situation in southeast europe...
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The global financial crisis and macroeconomic
policies: the situation in Southeast Europe
Michael A Landesmann
First Bank of Greece Workshop on theEconomies and Eastern European and Mediterranean
CountriesMay 14th 2010, Athens
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Topics: The global financial crisis and
macroeconomic policies – Southeast Europe
Switch of ‘growth model’ in Southeastern Europe?
New (external and internal) constraints emerging from the crisis
How to deal with structural imbalances
Policy issues:
- short-run vs. medium- and long-run
- fiscal, exchange rates, financial market reform, structural policies
- EU and national policy agendas
Features of the ‘old’ growth model:
targeted at integration with the EU area
was associated with significant internal and external liberalization (trade, capital transactions, financial market integration)
benefits: capital inflows, trade integration, ‘technology’ transfer
the model worked - ‘convergence process’ – but emergence of structural imbalances
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Growth – GDP at constant pricesAverage annual growth rates, 1995-2002 and 2002-2008, in %
Source: wiiw Annual Database incorporating national statistics, Eurostat.
02468
10
EU
-15
EU
-27
Austr
iaB
elg
ium
Denm
ark
Fin
land
Fra
nce
Germ
any
Irela
nd
Luxem
bourg
Neth
erlands
Sw
eden
Unite
dK
ingdom
Gre
ece
Italy
Port
ugal
Spain
Bulg
aria
Cypru
sC
zech R
ep.
Esto
nia
Hungary
Latv
iaLith
uania
Malta
Pola
nd
Rom
ania
Slo
vakia
Slo
venia
Cro
atia
Macedonia
Turk
ey
Alb
ania
B
osnia
&H
erz
eg
Monte
negro
S
erb
ia
Ukra
ine
Russia
0
2
4
6
8
10
EU
-15
EU
-27
Austr
iaB
elg
ium
Denm
ark
Fin
land
Fra
nce
Germ
any
Irela
nd
Luxem
bourg
Neth
erlands
Sw
eden
Unite
dK
ingd
Gre
ece
Italy
Port
ugal
Spain
Bulg
aria
Cypru
s
Czech R
ep.
Esto
nia
Hungary
Latv
iaLith
uania
Pola
nd
Rom
ania
Slo
vakia
Slo
venia
Cro
atia
Macedonia
Turk
ey
Ukra
ine
Russia
1995-2002
2002-2008
The crisis
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30405060708090
100110120130140150160
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10
BG RO HR MK AL BA ME RS
Exports total
in EUR, Jänner 2008 = 100
Source: wiiw Database incorporating national statistics, Eurostat.
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-10
-5
0
5
10
15
2008-1Q 2008-2Q 2008-3Q 2008-4Q 2009-1Q 2009-2Q 2009-3Q 2009-4Q
BG RO HR MK AL RS
GDPreal change against preceding year in %
Source: wiiw Database incorporating national statistics, Eurostat.
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10
40
60
80
100
120
140
160
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10
BG RO HR MK ME RS
Gross industrial production,
January 2008 = 100
Source: wiiw Database incorporating national statistics, Eurostat.
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70
80
90
100
110
120
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10
CZ HU PL SK SI
Gross industrial production,
January 2008 = 100
Source: wiiw Database incorporating national statistics, Eurostat.
Adjustment of the ‘growth model’:
1. The legacy of structural imbalances
2. New constraints following the crisis
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Trade balances of goods and services, 1996-2009 in % of GDP
-30
-20
-10
0
10
20
CZ HU PL SK SI
Source: Eurostat, wiiw calculations.
-30
-20
-10
0
10
20
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
BG RO HR MK RS AL
Trade balance of goods and services (BOP)in % of GDP
-24-18-12
-606
-24-18-12
-606
-24-18-12
-606
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NMS-5
Baltics
SEE
NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001).Source: wiiw Annual Database incorporating national statistics, Eurostat.Source: wiiw Annual Database incorporating national statistics, Eurostat.
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Trade balances of goods and services and income
balances, 1996-2009 in % of GDP
-30
-20
-10
0
10
20
30
Trade balance in % of GDP Income in % of GDP Transfers in % of GDP Current account in % of GDP
CZ HU PL SK SI
Source: Eurostat, wiiw calculations.
-30
-20
-10
0
10
20
30
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
1997
1999
2001
2003
2005
2007
2009
BG RO HR MK RS AL
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Industrial production cumulative change, 1995-1990, 2000-1990, 2008-1990
-100
-50
0
50
100
150
200
CZ HU PL SK SI EE LV LT
1995-1990 2000-1990 2008-1990
-100
-50
0
50
100
150
AL BG HR MK ME RO RS NMS-8
Note: ME; RS data for 1995-1990 refer to CS.
Source: wiiw Annual Database incorporating national statistics, Eurostat
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Industrial production cumulative change, 1995-1990, 2000-1990, 2008-1990
-100
-50
0
50
100
150
AL BG HR MK ME RO RS NMS-8
Note: ME; RS data for 1995-1990 refer to CS.
Source: wiiw Annual Database incorporating national statistics, Eurostat
Exports of goods and services (BOP)
in % of GDP
Source: wiiw Annual Database incorporating national statistics.
0
10
20
30
40
50
60
70
80
90
NMS-4 BG RO HR MK AL BH ME RS
2004 2005 2006 2007 2008
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Low-skill industries,as % of total manufacturing exports to the EU-25
0
10
20
30
40
50
60
70
80
90
100
AL BA BG HR MK ME RO RS NMS8
2005 2006 2007 2008
Source: Comext.
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Technology-driven industries, as % of total manufacturing exports to the EU-25
0
10
20
30
AL BA BG HR MK ME RO RS NMS8
2005 2006 2007 2008
Source: Comext.
Current accountin % of GDP
-18
-12
-6
0
6
-18
-12
-6
0
6
-18
-12
-6
0
6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NMS-5
Baltics
SEE
NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR, MK, BA (from 1998), RS (from 1999), ME (from 2001).Source: wiiw Annual Database incorporating national statistics, Eurostat.
Savings and investment in % of GDP
-10
0
10
20
30
public saving private saving public investment private investment
-10
0
10
20
30
-10
010
20
30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NMS-5
Baltics
SEE
NMS-5: CZ,HU,PL,SK,SI (from 2000-2007). SEE: BG (2000-2006) and RO (from 2004-2007). Source: wiiw Annual Database incorporating national statistics, Eurostat.
Summary on structural imbalances:
Severe weaknesses of tradeable sector;
Strongly deteriorating private sector savings-investment imbalances;
Adds up to unsustainable current account imbalances;
Role of exchange rate regimes;
Problematic allocation of FDI across tradable and non-tradable sectors (not shown);
Constraints following the crisis:
External factors:
higher risk assessment of the region;
more difficult internal and external financing;
reduced growth expectations for most important export markets;
tougher to join the eurozone (new OCA debate)
Constraints following the crisis:
Internal factors:
‘deleveraging’ of private sector, increased propensity to save;
more limited room to manoeuvre for fiscal policy;
weaker and more cautious banking sector;
tightened financial market regulation (internal and external)
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Summary of the argument on ‘redirecting
the growth model’:
1. Adjusting to new external constraints and internal behavioural responses following the crisis:
- External: lower export market growth, more difficult financing conditions, tougher effective EMU membership conditions; financial market regulation- Internal: weaker financial sector, deleveraging – higher domestic saving rates, less space for fiscal policy but more pressure on streamlining
2. Dealing with sustained structural imbalances:- Differentiation across country groups (e.g. fix- and flex-exchr. economies)
3. Policy challenges: - For the short run and the medium and longer run
- At national and at EU levels
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Redirecting ‘the integration model of growth’
The policy choices:
Fixed vs. flexible rates
Fiscal consolidation vs. fiscal stimuli
Free flow vs. financial market regulation
Structural policy issues
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Exchange rates
Flexible exchange rates have supported sustainable current
account deficits
Countries with flexible exchange rate regimes may have had a less
costly adjustment to the crisis
Fixed exchange rates tend to mandate pro-cyclical fiscal policies
during the crisis and in the medium run
EMU membership may not protect against real exchange rate
misalignments
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Exchange rate and current accountNominal exchange rate, average (NCU/EUR) Current account in % of GDP
Czech Republic
-10
0
10
20
30
40
1995 1997 1999 2001 2003 2005 2007 2009
Bulgaria
-30
-25
-20
-15-10
-5
0
5
10
1995 1997 1999 2001 2003 2005 2007 2009
Source: Eurostat.
Croatia
-15
-10
-5
0
5
10
1995 1997 1999 2001 2003 2005 2007 2009
Poland
-8
-6
-4
-2
0
2
4
6
1995 1997 1999 2001 2003 2005 2007 2009
Real appreciation*, 2008-2009EUR per NCU, PPI deflated, January 2008=100
90
95
100
105
110
115
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
AL RO RS
*Values over 100 indicate appreciation relative to January 2008.
Source: wiiw Database incorporating national statistics.
90
95
100
105
110
115
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
BA BG ME HR
Serbia
80
85
90
95
100
105
110
115
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
nominal exchange ratereal exchange rate, PPI-deflated
Exchange rates*Flexible exchange rate: drastic real depreciation after
September 20082008-2009, EUR NCU, Jan. 2008 = 100
*Values over 100 indicate appreciation over January 2008.
Source: wiiw Database, Eurostat.
Exchange rates*De-facto fixed exchange rate:
modest real depreciation after September 2008 2008-2009, EUR NCU, Jan. 2008 = 100
Albania
75
80
85
90
95
100
105
110
115
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
nominal exchange ratereal exchange rate, PPI-deflated
Croatia
75
80
85
90
95
100
105
110
115
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
nominal exchange ratereal exchange rate, PPI-deflated
Macedonia
75
80
85
90
95
100
105
110
115
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
nominal exchange ratereal exchange rate, PPI-deflated
Source: wiiw Database, Eurostat.
*Values over 100 indicate appreciation over January 2008.
Exchange rates*Currency board or euro as legal tender:
minor real depreciation after September 2008
2008-2009, EUR NCU, Jan. 2008 = 100
Bosnia and Herzegovina
75
80
85
90
95
100
105
110
115
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
nominal exchange ratereal exchange rate, CPI-deflated
Montenegro
75
80
85
90
95
100
105
110
115
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
real exchange rate, PPI-deflated
Source: wiiw Database, Eurostat.
Values over 100 indicate appreciation over January 2008.
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(Private and public) Debt and Fiscal Policy
In catching-up economies, in financially integrated areas, the
(nominal) interest rate on public debt is below the (nominal)
growth rate which implies that the sustainability of public debt is
assured except if primary deficits are permanently higher than
those that stabilize public debt to GDP ratios
In the current crisis, it does not seem that in most, not necessarily
all countries, structural primary deficit has changed permanently
so that fiscal balances are not sustainable
Finally, some of the hikes in fiscal deficits are the consequence of
the deleveraging of private debts and thus fiscal consolidation is
not the first best policy in those cases
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Gross external debt and public debt % of GDP, 2004-2009
0
20
40
60
80
100
120
BG RO HR MK AL BA ME RS
2004 2005 2006 2007 2008 2009
0
20
40
60
80
100
120
BG RO HR MK AL BA ME RSSource: wiiw Annual Database incorporating national statistics, Eurostat
Gross external debt
Public debt
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Debt in % of GDP
Gross external debt Public debt Private debt
Bulgaria
020406080
100120140160180
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Romania
0
10
20
3040
50
60
70
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Slovenia
0
20
40
6080
100
120
140
160
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Croatia
0
20
40
60
80
100
120
140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Eurostat.
Debt in % of GDP
0
50
100
150
Gross external debt Public debt, EU-def. Private debt (loans)
0
50
100
150
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NMS-5
SEE
NMS-5: CZ, HU, PL, SK, SI. Baltics: EE, LV, LT. SEE: BG, RO, HR. Source: wiiw Annual Database incorporating national statistics, Eurostat.
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Real leading NB/ECB interest rates,
2008-2010 CPI-deflated, in % p.a.
-10
-8
-6
-4
-2
0
2
4
6
8
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
HU PL RO
-10
-8
-6
-4
-2
0
2
4
6
8
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
Jul-0
9
Oct
-09
Jan-
10
SK BG EE LV LT
Note: For Estonia: 1-month interbank lending rate (Talibor); for Lithuania: 1-month interbank lending rate (Vilibor).
Source: Eurostat.
Flexible ER Fixed ER
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Policy recommendations for the improvement or the
redirection of the integration model of growth:
National agenda
Exchange rate flexibility wherever that is feasible (countries that
already use the euro or have committed to currency boards
would have to make sure that the euro is an optimal currency
union for them before joining EMU)
Countercyclical fiscal policy with sustainable fiscal deficits and
public debt to GDP levels
Use of taxation or insurance to prevent bubbles in financial
markets (sand in the wheels taxes on particular types of
investments)
Structural policy to strengthen tradable sector
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Policy recommendations for the improvement or the redirection of the
integration model of growth:
EU agenda
Copenhagen and Maastricht criteria should ensure that
accession to the EMU leads to sustainable currency union ex
ante
Enrichment of the Stability and Growth Pact with short-term crisis
management facility (support for anti-cyclical fiscal policy while
keeping track of fiscal sustainability)
Strengthening financial regulation for systemic risks; facilities for
bank restructuring and for regulation of cross-border activities
Use of EU Funds to support development of tradable sector
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Policy challenges for the
Short and medium term: - getting credit going again- real exchange rate adjustment vital in some countries
- pursue active fiscal policy in countries with room to manoeuvre - labour market policy
Medium and long term: - paying much closer attention to external disequilibria- flexible exchange rate regimes have proven to be more successful - sustainability of private and public debt development (cross-border financial market regulation, increased EU monitoring) - policies to promote the tradable sector (also involving EU transfers)